Households built up tremendous amounts of debt prior to the recession, and since then they have been working to reduce it. N.C. State University economist Mike Walden takes a look at how far they have come and how much is left to do.
“Well, first of all … before I answer that, this is tremendously important. This may be one of the biggest and most important factors right now in our economy, because households went into this recession with record high debt levels. The recession, among other things, obviously reduced jobs. It also reduced wealth. So, households have had to reduce their levels of debt tremendously over the last three to four years. And they have made progress.
“Before the recession, the debt-to-income ratio for households was 137 percent. Today it’s down to 114 percent. So, that’s progress. However, experts think that ratio needs to get down to around 100 percent or slightly lower before households would feel comfortable with their levels of debt. So, we’re not there yet.
“We’re making progress. We may be two to three years off in terms of reaching that 100 percent goal. But what this does imply … is that while households are paying down on their debt, they’re not going to be spending. If they’re not spending, the economy is going to be growing very, very slowly.”